Contributed by: Samvad Partners
Video game developers, in order to expand and sustain their business, employ certain revenue sources such as in-app micro-transactions to boost their revenue. Such in-app micro-transactions allow players to purchase in exchange for real-world funds certain in-game tools and content either for customisation, or to gain a certain edge over other players in the gaming world. The concept of in-game purchase as a form of micro-transaction has become popular amongst video game players ("players") where they are able to purchase permanent or temporary in-game content or tools for various in-game character customisations.
One such popular form of in-game micro-transaction involves the purchase of a loot crate/box, also known as a prize crate ("loot crate"). The players, knowing the risks of purchasing a loot crate with undisclosed items, are willing to invest real-world funds for an unknown and randomised reward that will allow such players to customise the aesthetics and enhance their gameplay. This popular form of in-game micro-transaction has become increasingly controversial since legislators have started categorising this form of micro-transaction as 'gambling' since the same involves taking of risks by players who stake something of value for unknown and undisclosed rewards. As appeared in the 1994 film Forrest Gump, the lead character Forrest Gump played by Mr. Tom Hanks said, “My mama always said, ‘Life was like a box of chocolates. You never know what you're gonna get.’” Similar is the nature of in-game micro-transactions involving the purchase of loot crates. The concept of loot crates has always been controversial amongst game developers, players and regulators. Many have accused the entire practice of offering loot crates as highly unethical since the same is exploitative in nature. To some extent, the exploitative nature of loot crates can be categorised as gambling.
Video games in order to sustain their businesses offer loot crates as a virtual consumable item. This form of monetisation allows players to buy such loot crates directly using real world currency. Alternatively, players can choose to buy such loot crates using in-game virtual currency (which they earn as rewards during competitive ranked matches). Such loot crates are at times offered to players for free by completing in-game challenges or they are given an option to buy in-game virtual currencies in exchange for real-world currencies which can later be used to redeem loot crates. Loot crates are also given out through product or brand promotions outside of the actual gameplay, such as rewards for watching certain streaming promotional events online through the gaming platform. Gaming companies in order to generate profits and boost their revenues introduce loot crates to monetise their game, which involves such micro-transactions.
Are Loot Crates Unethical?
Loot crates are typically redeemed for randomly allocated virtual consumables commonly known as loot. Such loot ranges from player avatars to cosmetic changes to in-game equipment such as player outfits, weapon and armour skins. The loot enables a player to customise and improve the aesthetics of their characters in the game. Loot crates offer players with a randomised collection of consumable items, with different odds for receiving such items. Despite being purchased with real-world funds, loot crates do not offer players any objects with materialistic value in the real world.
Loot crates may be available for only a limited period and such limited nature of a loot crate keeps players completely invested in the game which in turn generates a lot of revenue for gaming companies. Due to the limited nature of loot crates, players are inclined to spend more money to acquire them before the limited loot crates become unavailable.
Purchase of loot crates which seems to be an ethical micro-transaction tends to become exploitative when gaming companies incentivise a player to purchase them using real-world funds. It becomes unethical if gaming companies devise and implement strategies where a player's in-game progress solely depends on loot crates and accordingly, forces such players to invest money in it.
Gaming companies facilitate micro-transactions for the purchase of loot crates. Such micro-transactions are facilitated without revealing any information on the items that will be unlocked after the purchase. It can be said that players try their luck where they may or may not unlock a loot crate for a reward of their choice. Therefore, such technicality and randomised nature of loot crates raise the question of whether in-game micro-transactions should be considered as gambling and be regulated by the authorities.
Global Perspective and India’s Position:
Most of the video games which devise such strategies are not age-restricted and they do not provide players with any content disclaimer for gambling. Some European nations have imposed certain stringent gambling restriction rules on loot crates in video games. In a report released in 2018 by the Belgian Gaming Commission, loot crates were brought within the ambit of gambling. The Belgium Gaming Commission stated that money is not an important factor for a wager to qualify as a bet. It was further stated that value can be attributed to virtual currencies as long as that value has some degree of usability especially when a player finds it valuable during in-game customisations. Since in-game customisation provides players with an edge during the game, it has a certain value associated with it. It can be stated that betting on such in-game customisation items with certain values constitutes gambling.
In the United Kingdom, the practice of offering loot crates is not considered illegal as it is understood that the in-game items redeemed from loot crates have no real-life value outside of the gaming world. In other words, in-game items redeemed from the optional loot crates can only be used by players virtually within the gaming application and thus cannot be monetised or cashed out for real-world currencies. However, the authorities in the United Kingdom considered the harmful effects of gambling and decided to regulate the practice of offering loot crates. In September 2020, the government of United Kingdom opened the ‘call for evidence on the impact of loot boxes on gambling-like behaviour’. The call for evidence was officially closed in November 2020. At present, the government of the United Kingdom is gathering specific evidence on the impact of loot crates in video games.
Loot crates are strictly regulated in China, where video game companies are mandatorily required to provide transparency regarding loot crates and limit the number of loot crates to be redeemed by a player. Instead of putting a complete ban on the practice of offering loot crates, the authorities have employed restrictions and listed certain requirements to be followed by gaming companies.
There has been a sustained growth and surge of the gaming industry in India. The affordability of smartphones has triggered a boost in the mobile gaming industry that has provided the young population with a platform and ease of accessibility. In India, gambling laws governing both online and offline modes of gaming are regulated by each state with their individual set of rules and regulations. While there are restrictions on games of chance, games based on skill are permitted under most enactments.
In the past, the Indian Ministry of Electronics and Information Technology (“Ministry”) has taken views/made observations on various issues associated with online gaming. One such recent action taken and which is also quite fresh in public memory is the ban of PUBG Mobile, on grounds of breach of privacy of user data which was prejudicial to the sovereignty, integrity, defence, and security of India.
The regulators in India are yet to comment on the legality of loot crates. However, video game revenues in India passed the INR37 billion ($500 million) mark in 2017. It is also estimated that the gaming industry in India will surpass USD1 billion by 2021. Thus, there might be a possibility that regulators may lookout for the market surge.
The regulators, including the Ministry, are monitoring various company policies regulating storage, usage, and transfer of user data within India. However, the Ministry is yet to take a stance on the legality of loot crates, which in turn is allowing the business of loot crates to thrive in India.
In India, even though there exist state-specific laws to regulate gambling activities, gambling has been uniformly characterised as a 'risk' for 'reward' activity. The act of gambling in India involves a player getting rewarded either in cash or something valuable. Such reading of Indian laws is quite similar to the definition of gambling as interpreted by the Belgium Gaming Commission. Purchasing online loot crates involves a player risking real-world funds for a loot crate with undisclosed content. This form of micro-transaction matches with the definition/falls under the purview of being interpreted as gambling under the Indian jurisprudence.
The primary legislation governing the act of gambling in India is the Public Gambling Act, 1867. Apart from this statute, various states in India have also enacted state-specific laws to prohibit gambling activities within their territories. A majority of these laws are yet to bring online gambling under its purview and therefore, the position of law is quite unsettled as to whether the prohibitions listed under these legislations extend to the online medium of gambling.
The states of Sikkim and Nagaland have adopted legislation specifically regulating online gambling. The state of Sikkim regulates online gaming through the Sikkim Online Gaming (Regulation) Act, 2008 ("Sikkim Act"). This aforementioned legislation, while laying down a much clearer definition of online gaming, also aims at regulating them through both online as well as non-electronic formats. The state of Nagaland through the Nagaland Prohibition of Gambling and Promotion and Regulation of Online Games of Skills Act, 2015 ("Nagaland Act") prohibits the act of gambling on one hand and permits games of skill on the other. The definition of gambling under the Nagaland Act has clearly distinguished between wagers made on games of chance and wagers made on games of skills. The Telangana Gaming (Amendment) Act, 2017 has also expressly prohibited online gaming. It must be noted that the aforementioned statutes do not consider in-game micro-transactions as gambling and thus have failed to regulate the same. In other words, it could be safely said that the practice of employing loot crates in India, no matter how unethical it may seem to be, is thriving on ambiguity.
The digital gaming industry in India requires a very robust policy framework to evolve and match up to the global platform. Uncertain gambling laws in India are not conducive to innovation and therefore are not favourable for the expansion of gaming industry in India.
Need of the Hour:
Loot crates have become a crucial source of revenue for a majority of game developers and companies across the globe. Even though loot crates allow players to express their individuality and financially support video game developers, it cannot be ignored that a player puts real-world currency at risk while making an in-game purchase for loot crates. Thus, it can be stated that the nature of such a transaction satisfies the definition of gambling under Indian laws. It can be argued that loot crates produce problematic and randomised outcomes for the players.
In addition to the implementation of various parental controls for minors, certain gaming companies, online application stores, and other platforms have pledged for transparency and have implemented new policies with respect to the disclosure of odds for loot crates. Various gaming companies have employed such policies to mitigate the damaging effects of employing mechanisms promoting unethical gambling in their gaming applications.
The practice of employing revenue-generating devices such as loot crates can potentially be disastrous as the same has been found to encourage addiction amongst players. Therefore, loot crates should most certainly be strictly regulated by the authorities in India. Further, bringing loot crates under the purview of regulations would push various gaming companies to spread awareness amongst players and educate them on how to identify, manage and avoid gaming addiction by implementing various self-checks, and time limits on their gameplay.
Contributed by Samvad Partners
The above article has been authored by Ms. Nisha Mallik(Partner) and Mr. Saurabh Roy(Associate)